We’ve been following Lowe’s for years, and Matt first wrote some thoughts on the stock in 2020. Now seems like a good time for an update. Lowe’s is a simple, high-quality business in the midst of a multi-year transition that may leave it as an even higher quality business in the years ahead.
I love your point regarding “Near term uncertainty doesn’t bother me and it often creates an opportunity for those willing to shoulder a year or two of noisy returns before a business resumes its march upwards.”
I’d say for myself many of my best investments were made where I could purchase ownership in a business at an attractive price and was fine with a couple years of subpar returns due to short-term factors since I could see the long term compounding potential of the business.
The crazy thing to me is the average investor holds a stock for only ten months which undoubtedly should provide a substantial advantage for those of us looking to own (not simply “invest in”) high quality businesses over the long-term.
Outside of earnings multiples I think it’s important to look at net-income to FCF conversion rates. I’m sure you’ve seen it before but there are some businesses I’ve seen that simply retain a lot of earnings without much to show for it. It seems like some lower quality businesses just need to reinvest a lot of their earnings just to stay in the same place let alone grow. It’s quite a weird phenomenon and almost feels like phantom earnings. I’m not sure how much of this is accounting trickery to inflate earnings as well.
I really liked how you analyzed the retained earnings within Lowe’s and then broke down how the capital was allocated and the return on reinvested earnings. I’m definitely going to use that technique in my own analysis in the future.
I’m not sure what the scale of the capital managed by EPC looks like, but I’m curious what your thoughts are regarding leveraging size as an advantage to drive investment outperformance. When I was at the Berkshire Hathaway shareholder meeting last weekend I was thinking a lot about this when looking back at many of their earlier investments like Sees Candy, etc. and the amazingly low valuations they paid for many businesses along with their current size problems making it hard to find uses for excess cash that really move the needle.
It made me think that there might be more poorly valued or priced assets within the lower market capitalization companies so I’ve been focusing more on that area lately versus on analyzing large cap companies like Lowe’s, etc. Intuitively it just feels like there might be more opportunities and less competition there for a smaller investor such as myself and I’d like to leverage every possible advantage at my disposal.
1. Why do you think that HD has better SG&A as a %Sales? They don't discriminate SG&A in their 10K's.
2. "Turning back to Lowe’s, let’s say after the next several years the margin expansion opportunity is realized and there is no more opportunity there." Which margin do you mean? Gross or EBIT? If it's EBIT, I'd love to know why.
3. To end, it's been hard to find outlets for the retained cash, which makes me think that the real reinvestment rate is more close to 0% than 25%. Do you see the reinvestment outlets and amounts?
I love your point regarding “Near term uncertainty doesn’t bother me and it often creates an opportunity for those willing to shoulder a year or two of noisy returns before a business resumes its march upwards.”
I’d say for myself many of my best investments were made where I could purchase ownership in a business at an attractive price and was fine with a couple years of subpar returns due to short-term factors since I could see the long term compounding potential of the business.
The crazy thing to me is the average investor holds a stock for only ten months which undoubtedly should provide a substantial advantage for those of us looking to own (not simply “invest in”) high quality businesses over the long-term.
Outside of earnings multiples I think it’s important to look at net-income to FCF conversion rates. I’m sure you’ve seen it before but there are some businesses I’ve seen that simply retain a lot of earnings without much to show for it. It seems like some lower quality businesses just need to reinvest a lot of their earnings just to stay in the same place let alone grow. It’s quite a weird phenomenon and almost feels like phantom earnings. I’m not sure how much of this is accounting trickery to inflate earnings as well.
I really liked how you analyzed the retained earnings within Lowe’s and then broke down how the capital was allocated and the return on reinvested earnings. I’m definitely going to use that technique in my own analysis in the future.
I’m not sure what the scale of the capital managed by EPC looks like, but I’m curious what your thoughts are regarding leveraging size as an advantage to drive investment outperformance. When I was at the Berkshire Hathaway shareholder meeting last weekend I was thinking a lot about this when looking back at many of their earlier investments like Sees Candy, etc. and the amazingly low valuations they paid for many businesses along with their current size problems making it hard to find uses for excess cash that really move the needle.
It made me think that there might be more poorly valued or priced assets within the lower market capitalization companies so I’ve been focusing more on that area lately versus on analyzing large cap companies like Lowe’s, etc. Intuitively it just feels like there might be more opportunities and less competition there for a smaller investor such as myself and I’d like to leverage every possible advantage at my disposal.
Thanks for the write up Dan!
1. Why do you think that HD has better SG&A as a %Sales? They don't discriminate SG&A in their 10K's.
2. "Turning back to Lowe’s, let’s say after the next several years the margin expansion opportunity is realized and there is no more opportunity there." Which margin do you mean? Gross or EBIT? If it's EBIT, I'd love to know why.
3. To end, it's been hard to find outlets for the retained cash, which makes me think that the real reinvestment rate is more close to 0% than 25%. Do you see the reinvestment outlets and amounts?
Take care!